New Corporate Insolvency Act – what does this mean for business?

New Corporate Insolvency Act – what does this mean for business?

June 22, 2020


The Corporate Insolvency & Governance Act 2020 (“The Act”)

The Act implements insolvency reforms first proposed by the government as far back as 2016, which were the subject of extensive public consultation and then a further government response in August 2018. The reforms then lay dormant until brought back to life by the Coronavirus crisis in March 2020.

The significance of the new processes and permanent measures cannot be understated. In particular, the Act re-emphasises the rescue culture as one of the fundamental pillars of UK insolvency law. It creates two new permanent, debtor-friendly restructuring processes, the Moratorium and the Restructuring Plan, which increase the options available to companies in financial distress.

This shift towards more debtor-friendly procedures seeks to maintain the UK’s position as a key jurisdiction for conducting international restructurings and is broadly similar to reforms taking place elsewhere in Europe and beyond.

Below summarises the main provisions of the Moratorium.

The Moratorium

Background

The Moratorium is a new process, which is designed to stave off formal insolvency and provide a company with breathing space in respect of its debts. It can be used whether a company is already insolvent or facing the risk of becoming insolvent unless it is restructured. A fundamental requirement of the process is that a Moratorium must be likely to result in the rescue of the company as a going concern.  The intention is to provide directors with a period within which to explore rescue or restructuring options.

The Moratorium is a director-driven process, under which the directors retaining full management and control of the company throughout. Nevertheless, the procedure also requires the appointment of a Monitor, who must be a qualified insolvency practitioner and who must have consented beforehand to act on the basis that they believe a going concern rescue is achievable. The Monitor’s role is to oversee the company’s affairs on an ongoing basis for the purpose of maintaining their belief that this remains the case and to call a halt if they conclude that its rescue is no longer achievable.

The Moratorium is not an insolvency procedure; instead, it is only a debt enforcement standstill.

Effect of the Moratorium

The company does not have to pay debts incurred prior to the commencement of the Moratorium and which have fallen or will fall due for payment before or during it. But it does have to pay debts incurred while it is in force and as they become due. Specifically, it must pay:

  • the Monitor’s fees and expenses
  • for goods or services supplied to the company during the Moratorium
  • rent in respect of any period during the Moratorium
  • wages or salary under a contract of employment
  • redundancy payments

It must also settle debts or other liabilities arising under a ‘contract or other instrument involving financial services’, which includes amounts due under finance agreements.

No formal insolvency proceeding can be brought against the company, except where they are initiated by the directors.

Enforcement or legal action against the company and its assets is heavily restricted, including the suspension of enforcement of security without the permission of the Court, rights of forfeiture and repossession of goods in the company’s possession under hire-purchase contracts.

Some of the rights of floating charge holders are suspended; crucially, the lender cannot crystallise a floating charge by giving notice and any provision in a floating charge which restricts the sale of assets cannot be imposed on the company.

There is some protection for those dealing with the company. The fact that a Moratorium is in place must be publicised, there are limits on the amount of credit the company is able to obtain and there are restrictions on the granting of further security over its assets.

 Commencement and duration

Obtaining a Moratorium is a process very much like the start of an Administration; a set of simple documents (including the Monitor’s consent to act) is filed in Court without notice to creditors or other stakeholders. It ends 20 business days after it takes effect, unless it is extended by the directors filing a notice and certain supporting documentation at the Court at any time after the 15th business day after the Moratorium first took effect. Once these papers have been filed, the Moratorium is automatically extended for a further 20 business days, once more without prior notice to creditors.  Alternatively or in addition, the Moratorium can be extended further with the consent of creditors or the consent of the Court.

Which companies qualify for a Moratorium?

All companies are eligible, including some foreign entities. There are some exclusions, predominantly in the insurance and finance sectors. However, the procedure cannot be used by any companies, which have been subject to a Moratorium or an insolvency procedure in the preceding 12 months.

Can the Moratorium be challenged?

Only on the grounds that the eligibility criteria have not been met or that its continuation will result in unfair harm to the applicant’s interests.

Related News

Opus continues expansion plans with offices in Leeds & Newcastle

December 4, 2020

Read more

Categories: Group, Opus News, Restructuring & Insolvency

Company Voluntary Arrangements (CVAs) in the current climate

December 3, 2020

Read more

Categories: Group, Restructuring & Insolvency

Categories

Previous Articles